11 June 2009

The Rich Are Getting Poorer

The Federal Reserve reported Thursday that household net worth fell to $50.38 trillion in the January-March quarter, the lowest level since the third quarter of 2004. The first-quarter figure marked a decline of 2.6 percent, or $1.33 trillion, from the final quarter of 2008. . . .

The value of Americans' stock holdings dropped 5.8 percent from the final quarter of last year. The slide on Wall Street that began in late 2007 and gained speed last fall erased more than half the value of the U.S. stock market. The value of stocks in the Dow Jones U.S. Total Stock Market Index, which measures nearly all U.S.-based companies, tumbled to $8 trillion when stocks hit a 12-year low on March 9. That was down from $19.2 trillion in October 2007. The central bank's numbers don't reflect all the gains since stocks began rallying. On paper, the market is up $3.1 trillion from early March, though still down $8.1 trillion from the peak.

Another hit to household net worth came from falling house prices. The value of real-estate holdings fell 2.4 percent, according to the Fed report. Collectively, homeowners had only 41.4 percent equity in their homes in the first quarter. That was down from 42.9 percent in the fourth quarter and was the lowest on records dating to 1945. The Case-Shiller national home price index, a closely watched barometer, last month estimated that house prices dropped 7.5 percent during the first quarter. Prices have fallen 32.2 percent since peaking in the second quarter of 2006. . . .

During the recession's deepest point in the October-December period, Americans' net worth fell a record 8.6 percent, according to revised figures. That was the largest drop on records dating to 1951.

The last time I saw a number, about half of the stock market by value, which encompasses almost all of American big business, was owned by about 1% of households, roughly 1 million households in all.

Declining asset prices disproportionately hurt those who disproportionately own assets. By definition, those people are the rich. Also, since senior executive pay at publicly held corporations is overwhelmingly composed of stock options, and stock options, as a matter of mathematics, always lose value faster than the stocks themselves do in a declining stock market, the financial crisis is producing what is probably the biggest executive pay cut in living history.

Wage and salary employees aren't immune to pay cuts and layoffs, but have far more stable compensation relative to asset values.